Why Smart Contracts Are Needed to Coordinate the Process Steps in a Supply Chain

A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer (Source: supplychaincanada.org). In commerce, complex supply chains require sophisticated management mechanisms. In this article, we explore wh smart contracts are needed to simplify the process of managing a supply chain.

The Supply Chain Management Process

A supply chain involves all the steps a company takes to transform raw material into a finished product. Traditionally, companies deploy supply chain management systems to ensure efficiency and cost-effectiveness in their supply chains. There are basically five components of supply chain management. These components are:


1. Plan
2. Develop
3. Production
4. Conveyance
5. Return


Supply chain planning is the underlying phase of the production network process. It is necessary to build a methodology to address how order requests would be fulfilled. Supply chain management centers around planning a methodology that returns the greatest benefit at minimal cost. In the development phase, the predominant focus is on building a solid association with suppliers of crude materials required for production. Production is the third step in SCM is the assembling or creation of products ordered by the customer. In this stage, materials and products are planned, created, tried, bundled, and synchronized for the next stage, which is conveyance. The items are conveyed to the customer at the ordained area by the provider. Customer orders are acknowledged and conveyance of the products is arranged. Firms team up for the receipt of requests from customers, build up a system of distribution centers, pick bearers to convey items to customers and set up an invoicing framework to get installments. Lastly, during the return stage, blemished or harmed products are brought back to the provider by the customer. At this point, organizations need to manage customer inquiries and react to their complaints.


When a company deals with a large number of customers and a wide variety of products, the steps above becomes very complex. This is where smart contracts and blockchain comes in. Blockchain can be leveraged to improve the processes involved in the supply chain, using smart contracts.

Smart Contracts for Supply Chain Management

A smart contract is a computer convention expected to digitally facilitate, confirm, or implement the transaction or execution of an agreement. Smart contracts permit the execution of valid transactions without outsiders. These transactions are identifiable and irreversible. As a computerized transaction protocol that executes the terms of a contract, a smart contract is distributed to all relevant stakeholders through a blockchain.


All parties to the contract can view the contract in real time but are unable to change the terms of the contract after execution. Any bugs or security loophole that may compromise the contract can easily be detected by any of the members affiliated to the contracted and thus be fixed as soon as possible. Embedding smart contracts on to the supply chain process simplifies the supply chain process, increasing efficiency while significantly reducing costs.


Smart contracts run on a blockchain, also known as a digital ledger that contains immutable information about transactions, data, and other types of information. All the above five supply chain processes can be embedded into smart contracts. During the planning stage of a product, smart contracts protect the intangible capital of the company. These may include trademarks, trade secrets, methodologies, patents, and other intellectual property. Meanwhile, some firms may think these aspects aren’t all that important but leakage of such information into the public domain can jeopardize the business potential of their companies.


During the delivery stage, smart contracts help ease transactions. Existing supply chain systems use banks that charge customers a lot of money in fees when ordering products from a supplier. Nevertheless, customers sometimes do not get their products on time or do not get them at all. With a blockchain powered smart contract system, users can track the movement of ordered products in real time. Plus, smart contracts can erase counterfeiting since users can verify the authenticity of any product before purchasing it.


Smart contracts also come in handy should a user return a defective product to the factory. Both the user and the product manufacturer can track the defective product until it is replaced and shipped back to the customer. In this way, the efficiency of doing business is improved while increasing customer satisfaction.


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